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As Latin America's underdevelopment fades into memory, one of the businesses leading the region into the 21st century is
MercadoLibre,
MELI 0.450112528132033%MercadoLibre Inc.U.S.: NasdaqUSD133.9
0.60.450112528132033%
/Date(1425420000152-0600)/
Volume (Delayed 15m)
:
442349AFTER HOURSUSD133.9
%
Volume (Delayed 15m)
:
1058
P/E Ratio
82.14723926380368Market Cap
5885861472.03064
Dividend Yield
0.4958924570575056% Rev. per Employee
256350More quote details and news »MELIinYour ValueYour ChangeShort position
an online retail site that combines elements of eBay, PayPal and Amazon. Twelve years after founder and Chief Executive Marcos Galperin hatched the idea at Stanford's business school, MercadoLibre is robustly profitable and growing fast. From an $18 initial offering in 2007, shares of the Buenos Aires-based outfit (ticker: MELI) soared as high as 104 this year, before settling back to a recent 74.73. That price represents a handsome $3.3 billion market cap – some 10-times last year's revenues and 43-time earnings.

"When we started this business, only 2% of the region's population was online," says Pedro Arnt, MercadoLibre's financial chief. "Today, 40% of the population is online and the opportunity is even larger than it was in the first 10 years."

MercadoLibre should continue to enjoy its well-earned success, but investors may revise the stock's airy multiple after the ginormous
Amazon.comAMZN -0.27096757464573257%Amazon.com Inc.U.S.: NasdaqUSD384.61
-1.045-0.27096757464573257%
/Date(1425420000361-0600)/
Volume (Delayed 15m)
:
1861999AFTER HOURSUSD384
-0.610000000000014-0.15860222043108604%
Volume (Delayed 15m)
:
84021
P/E Ratio
N/AMarket Cap
179092011988.82
Dividend Yield
N/ARev. per Employee
577469More quote details and news »AMZNinYour ValueYour ChangeShort position
(AMZN) enters Latin America in earnest. The e-commerce giant is famously tight-lipped, but Amazon's recent help-wanted postings show that it's staffing up in Brazil, the biggest market for MercadoLibre. Even without physical operations in Latin America, Amazon's Websites are already among the continent's top three e-commerce destinations. With its leading-edge technology and capital investments, the Seattle-based giant has quickly surpassed local incumbents when it's gone into countries like France and the U.K. MercadoLibre may punch above its weight class, but it can't beat Amazon.

Amazon has been looking to hire people in Brazil, MercadoLibre's biggest market.
Barron's Graphics

MercadoLibre has done plenty right. In the late '90s, Galperin noticed that eBay wasn't focused on Latin America. So in 1999, he launched MercadoLibre as a South American clone of eBay's online auction marketplace. In 2001, MercadoLibre took over eBay's Brazilian business in exchange for a slug of stock that eBay still holds, making it MercadoLibre's largest shareholder with an 18% stake. Over time, MercadoLibre entered a dozen countries and added such features as MercadoPago, its knockoff of the eBay payments processor PayPal. These days, about 90% of items sold on its Websites go at fixed prices–in the style of Amazon, not eBay.

Unlike Amazon, MercadoLibre doesn't inventory product for sale and delivery to consumers. In its less capital-intensive model, MercadoLibre charges third party sellers a percentage of each transaction's value. Steady technology upgrades have made the company's marketplace easier for buyers and sellers–CFO Arnt likens it to removing friction from transactions. It's worked. The gross value of sales on MercadoLibre's Websites jumped more than 41% in 2011, to $4.8 billion, while the company's own revenues rose 38% to almost $300 million. With healthy operating profit margins of 33%, net income in 2011 was $77 million, or $1.73 a share. Shareholders get a cut, with a $0.44 annualized dividend.

Success in e-commerce seems to come with good technology, and MercadoLibre's commitment to improving its technology platform has helped it sprint past predecessors like
B2W,
BTOW3.br 0.2506265664160401%B2W Companhia DigitalBrazil: BovespaBRL20
0.050.2506265664160401%
/Date(1425424021000-0600)/
Volume (Delayed 15m)
:
560800
P/E Ratio
N/AMarket Cap
5096914411.3254
Dividend Yield
N/ARev. per Employee
N/AMore quote details and news »BTOW3.brinYour ValueYour ChangeShort position
the Sao Paulo-listed online retailer whose shares (BTOW3.Sao Paulo) and profits have tumbled amid a chorus of consumer complaints. "We are the incumbent and the largest player," says Arnt, of his company's position in Latin America. "The scale advantage really belongs to us, at this point."

THAT ADVANTAGE, UNFORTUNATELY, will prove fleeting with the arrival of Amazon to the continent of its namesake. MercadoLibre may have the best technology in its region, but Amazon's is the best on the planet. It also has scale, by the way. Even after hefty capital expenditures, Amazon's free cash flow in 2011 surpassed $2 billion, compared to about $70 million for MercadoLibre. "We believe that Amazon has fundamental competitive advantages," says Sanford C. Bernstein analyst Carlos Kirjner, who likes Amazon's stock despite its giddy height, and who doesn't follow MercadoLibre. "It takes a unique technology capability and infrastructure to run such a business and we don't know anyone else who can compete at that scale."

The Bottom Line

MercadoLibre's shares could get hit if Amazon, as recent hiring suggests, moves into the Latin American company's home turf. MercadoLibre's founder recently sold shares.

Amazon keeps even admirers like Kirjner in the dark about its plans, but Amazon's job postings reveal that it's staffing up a Sao Paulo location to provide its unique cloud-computing web services to Latin America's merchants. It seeks human resource experts skilled in "onboarding" staffers, as well as managers who will recruit third-party sellers onto Amazon's platform.

Over half of MercadoLibre's sales are in Brazil. There's no telling exactly when Amazon will launch there, it didn't return our calls. But as the giant has rolled its offerings across Europe, the continent's incumbents – from Dixons to 3 Suisses– have had to retrench. When Amazon opens in Latin America, chances are that MercadoLibre shareholders will lighten up on their investments…just like founder Galperin did three months ago, when he unloaded almost 15% of his holdings in sales totaling about $74 million. MercadoLibre wouldn't comment on his stock sale.